Trading the rally- Tiger by the tail

The government has managed to have its say in so far as the policy relating to FDI in retail is concerned. Our markets seem to think that this is a great thing and that this is perhaps a harbinger of things to come and that the ruling party will be able to push through everything required to make India a welcome destination for money from overseas. It is clear to all that our domestic finances are beyond repair (with expenditure constantly trailing revenues) and we need to attract enough of foreign capital flows in order to postpone our troubles. At some point, there will be a price to pay for sure, unless India structurally improves in a manner that export of goods and services will exceed the imports. The government is trying to focus on areas like restricting import of gold, which may plug some leak, but do not address any structural issues. So, the government is turning its attention to hang the ‘welcome’ signs to the foreigner to bring in his money. However, things are not so simple. If we look at the FDI in retail, the government approach is terrible. A new entrant will need to full fill a host of conditions and also seek each state government’s approval to open shop! General consensus is that at best this may bring in around ten billion dollars or so over three to five years. On the domestic front, the government is trying to bridge the fiscal gap by selling assets. This is a temporary solution. Once the government runs out of assets to sell, the problem re-surfaces. So, our problem of being financially ‘unviable’ (with revenues constantly falling short of expenditure) is an inherent one. The government is not investing in infrastructure that can help bridge this gap. Not that it is unwilling to, but is giving the impression that it cannot do. Roads, ports, power, logistics et all are the things required if India is to get a competitive edge in manufacturing or services. Simple labour arbitrage is not anything sustainable as wages will move towards each other (job losses in one country will move wages down, impose protectionism tariffs etc and job gains in the export nations will raise disproportionately). The world economies are also yet shaky. Europe is still troubled and it is possible that nations like Greece that were forced to accept moderation will go back to being profligate, causing yet another round of turmoil. The Euro zone is damp, US has to overcome its own fiscal cliff of moderating its finances and Japan is on the verge of contracting. So, domestic demand alone cannot keep us buoyant for long. We are going to feel the pain. The domestic politics of appeasement is also financially disastrous in the long run. There is a race to offer freebies to the populace by the Centre as well as the State governments. All of this fuel inflation. Supply side boosters are missing totally. Inflation is finally taking its toll on the consumer. We can see slowing demand in consumer durables, even whilst personal credit is growing. Interest rates could drop, but would not perhaps be significant enough to boost any demand. In this backdrop, our markets have turned bullish, on the back of record FII inflows in to the equities and debt segment. On top of that, the bulls point to the FDI victory in both houses of the Parliament as a sure indicator of the government pushing through reforms. As the government nears its last full year budget before elections, optimism is clearly visible. In this noise, it is important to keep a cool head. If you are a trader and want to trade this expected up move, do it with speed and caution. Speed because the market does not wait for you to complete your analyses etc., Caution because I do not see this move backed by fundamentals. The way to exercise caution is to have clear strategies for trading in terms of booking profits, having stop losses etc. Investment for the long terms can wait. Our markets are expensive at present levels and the run up in the last five to six weeks is clearly driven by liquidity and by very optimistic set of assumptions. It is very likely that the markets may be on tear for some more time, but given my conservative nature, I will keep aside. Quality stocks are expensive. The rally is driven by lesser quality names and at best, a trading opportunity.

TOWER IPO_ FUND DAMAGERS- WHY INVEST TO LOSE?

The institutional fund managers, who are custodians of investor money have demonstrated their irresponsibility by subscription to the issue of the Tower company that closed today. The whole world is touting that it is expensive, but these guys think it is cheap. By keeping away, they could have got the stock far cheaper in the secondary market later, if they love the stock so much. These kind of investments give rise to suspicion about the integrity of the fund managers. Unless they have a personal interest, I cannot imagine anyone investing in this issue. Surely there are far better investment opportunities available in the secondary market. Perhaps it is time for SEBI to step in and have a separate disclosure about investment in IPO by the fund managers. As it is, the fund managers are the only creatures in the industry who do not have any qualifications or hurdles to be cleared to manage money. An investor needs to be KYC compliant, a distributor has to pass exams, etc. If SEBI thinks it should be bothered with investor protection, a good place to start with would be to look in to which fund managers invested in this issue and keep an eye on them.

A liberal view of Direct Cash Subsidiy

The cash transfer scheme was first mooted by the UPA in 2005. The push came from the western world, which advocated direct cash transfers in order to overcome the shortfalls in the Public Distribution System (PDS). There is also a political angle to it. A government that is seen to be handing out cash can be perceived to be a benefactor and translate in to votes. A combination of both is the reason for the UPA government to push this scheme through. What it entails is to do away with the PDS. All products at free market prices and to those people who qualify for the ‘cash transfer’ (estimated at around one crore families) a periodic cash amount will be transferred to their bank accounts to enable them to buy essential stuff like food, fuel etc at market prices. In theory it sounds excellent. Free market means that no one has to do the complex PDS management and also help the nation to be rid of scams in ration distribution and control. We can also be rid of black marketing of essential commodities if cash transfers are adopted. To the actual recipient, this should be a good thing, in theory. No longer should they have to deal with the evil PDS chain. They can now buy freely from where they want. Similarly, for the government, a fantastic saving by shutting down the PDS, saving the costs associated with it (storage, distribution, procurement etc). Such kinds of programs exist in over 40 countries and were kicked off nearly two decades ago. By and large most have been doing well, except in a few cases, corruption has reared its ugly head there also. For instance, in small towns in India, it is not uncommon for the monthly pension payout to be subjected to a “toll” by the disbursing authority. India being India, corruption is endemic and embedded in the genetic structure. We will find a way to exploit every system. If administered properly, the end result would be a huge financial gain to the nation. The administrative mechanism (now proposed to be through the Aadhar scheme) has to be perfect. And it is going to be a task to ensure bank account opening. Without being negative about it, let us hope that the experiment succeeds. The scheme could take four to five years to be fully implemented. Hopefully, this would also mean that every citizen pays for every service or product. Electricity need not be given free, fertilizers need not be subsidised, and kerosene and diesel need not be separately priced. Corporate entities in the listed space would rejoice. Electricity projects need not get stalled because state electricity boards will now be able to meet commitments properly. The scheme rolls out in 51 districts in 14 states of the country on Jan 1, 2013, and will cover all the country's 640 administrative districts by end-2013. On paper, it sounds excellent, does it not? In reality, there will be more problems than solutions. People will take the cash subsidies; spend it on liquor, entertainment and mobile phones etc. Families will start to starve because they cannot now afford food at market prices, having spent the money elsewhere. And once people are addicted to cash receipts, each successive government at the centre and the state governments in conjunction will keep giving away more and more. In reality, corruption would tend to rise. The other issue is that the cash transfer, once given, cannot be taken away even if the person improves his standard of living. To take it away would be politically inconvenient and would lose votes. The other thing is that the scheme would have to be inflation indexed to provide for increase in food prices. A straw poll would indicate that women of the household would prefer subsidised food to getting cash in to the hands of the males, who would make a beeline for the liquor shop. The other thing is that coming close to the general elections of 2014, the scheme will be seen as a UPA or rather a specific Rahul Gandhi scheme (he is going to inaugurate the roll out ) and will ensure Congress voting by the masses. To this extent, such schemes generally can be construed to be a political tool for vote garnering. The other big risk is that the last mile reach through the banking system will pose problems. In the garb of overcoming that, the scheme might move to cash disbursement at designated locations, which will become a hotbed for corruption. If the scheme goes through, from the stock market perspective, bet on oil marketing, fertiliser, sugar, electricity, power generation etc. Forget the macro for now and see how it unfolds.

Close down the PSUs

The PSUs in India are a sad lot. They handle some of the key sectors and compete for manpower at a fraction of the salaries that private sector offers. Given this, they either attract very motivated persons or those who use the easy route of corruption that PSUs offer. Came across a newsletter that makes for very sad reading: http://www.dnaindia.com/mumbai/report_no-invite-psus-keep-from-iit-b_1773081 Apparently, someone has filed a PIL asking why PSU’s are hiring from IITs! In effect, the litigant says that PSUs should offer equal opportunity to all college graduates and not give any preference to any institution. In other words, an engineer from IIT is the same as one from any private engineering college from the back of beyond. So, even if the PSUs want to have any kind of decent quality people, the Indian system will not. Our legal system also is under stress. The PIL was filed over a year ago. No response yet. All the more reason that we get rid of our PSUs without delay. Improve efficiency and let the government pay attention to law and order. Why should the government be in the business of business?

FISCAL CLIFF? WHAT ME WORRY..

A view on the FISCAL CLIFF The "fiscal cliff" is a term used in discussions of the U.S. fiscal situation to describe a bundle of momentous tax increases and spending cuts that are due to take effect at the end of 2012 and early 2013. In total, the measures are set to automatically slash the federal budget deficit by around $600 billion or approximately 4 percent of GDP between FY 2012 and FY 2013, according to the Congressional Budget Office (CBO). The abrupt onset of such significant budget austerity in the midst of a still fragile economic recovery has led most economists to warn of a double-dip recession in 2013 if Washington fails to intervene in a timely fashion. (The above is a succinct summary from the Council on Foreign Relations (CFR) USA) The US has a ceiling for debt that cannot be breached without legislative action. The grim financial position led to an unprecedented credit downgrade, with the US losing the prestigious triple A rating. To cut this $600 billion, it involves an expenditure cut of nearly $400 billion and hike in revenues by around $200 billion. At this juncture in time, when the US economy is poised between recovery and recession, the impact could be catastrophic. Raising taxes, removing tax breaks, reducing defense expenditure, reducing healthcare, reducing unemployment benefits and other unpopular decisions would have a deep economic impact too. Healthcare cuts would impact drug companies; defense cut would impact fortunes of defense equipment suppliers and so on. The other thing that will surely play a role in what action America takes, is the recent disaster caused by hurricane Sandy. The impact on US would surely be shrinkage in GDP (with worst case estimates being a four percent drop in GDP!), job losses and drop in corporate profits (a combination of higher taxes and falling demand). More moderate estimates peg a half percent decline in the GDP of the US during 2013. IMPACT When the US sneezes, the world catches cold. Within US, there would be higher unemployment, lesser corporate earnings and reduced economic activity. Coming on the back of a none-too exuberant 2012, the outlook for 2013 will be adversely impacted. Reduced imports by the US will have impact on all economies in the world. Global money flows would be uncertain as US corporations will be bent on preserving cash rather than investing in growth. It would have a cascading impact on global growth and across the world, economic growth would be dampened. The Euro zone and Japan would be particularly vulnerable given their fragile economic situation. What would it mean for India? Difficult to guess at this stage, except to guess that it would be another negative factor for capital flows. US centric Indian companies would face some squeeze on their businesses. One possible impact could be lower oil prices, if US demand contracts. That could be the silver lining on the cloud for India. As far as our markets are concerned it would mean increased volatility in our equity markets, making the case for higher asset allocation to fixed income. MIDDLE OF THE ROAD? Many global experts opine that it would be impractical or impossible to achieve the fiscal measures that are prescribed. In the US, it is likely that a half way approach would be taken to ensure growth in the economy. Instead of trying to slash the budget deficit by the prescribed four percent, the real cut may be between one and two percent. This would mean only a partial cut in expenditure and a calibrated hike in taxation rates. Perhaps a more gradual road map would be laid out for fiscal consolidation. This would mean that the US would have to resort to higher borrowings. After the experience of the Euro zone with higher borrowings, it would put pressure on US credit ratings again. The US would perhaps benefit from the confidence of the global investors (who keep seeing their options declining day by day) who would still perceive US as a relatively safe harbour in a storm. Many possibilities exist and from here, we cannot really take an informed view. All it means is that the world’s largest economy is going through turbulence and the impact will be felt across the globe. And given the fact that most economies are driven by big business interests, I would put my money on the US not wanting to sacrifice growth. Fiscal discipline and consolidation can wait.

LAZY INVESTING-

My latest piece in MONEYLIFE Thoughts for the discerning armchair investor A very valuable lesson in investing I learnt was from the father of one of my friends. His basic advice was that I should buy two residential houses. One should be for living in and the other for getting a steady rental income. The logic was very simple—one cannot be very sure about any financial instrument or inflation. If inflation goes up, rentals will go up. When one stops working, there is a house to live in and another one that will fetch a rental income. He also mentioned that the second home should be in a good locality and command excellent resale value, while the first one can be in a poor area. This was in the early 1980s. In those days investment in real estate made sense. Stocks were not very popular then; though, looking back; they were perhaps the best times to buy MNC stocks. Today, it is very tough to take a call on any company and expect it to deliver multiple returns. Going by pure faith, the choices get restricted to the HDFC-type of companies or MNCs. I expect more fairness from these companies than from family-owned Indian enterprises. To me, the one big difference between family-owned companies and government ones is that the former are driven by profits and are aware of the need of capital markets to thrive, whereas government companies have no articulated profit-making goals. Mutual funds as an investment vehicle seems okay to me, but one cannot expect anything spectacular from them. Over the long term, perhaps, the returns could be around 15% per annum. Of course, a lot will also depend on how, when and where I invest. Market conditions will have a lot to do with my returns as well, whether I adopt the SIP route or not. Choosing between a mutual fund route and direct equities is a personal call. Mutual funds offer us diversification of portfolio and investing in many mutual fund schemes simply diversifies fund managers’ skills. I would rather pick on a basket of six to 10 companies and build up a portfolio of those. The index, to me, is a very poor benchmark to aspire for. The making of an index is not based on quality or prospects but on other criteria that are irrelevant to returns. My basic expectation would be to get a bit more than the GDP growth (say 5% to 6% per annum over the long haul). Therefore, I will have to pick stocks from sectors that will grow faster than the GDP. In terms of sectors, I will pick those which are driven by consumer spending. Logically, the choices would be sectors like automobiles, FMCG (fast moving consumer goods) and pharmaceuticals. I will avoid sectors which are dependent on government action or intervention as the risk is too high. Those are merely speculative opportunities and do not create wealth. I am a big fan of cash flow analysis. I like companies that pay taxes (not merely make provision for deferred taxes) and generous dividends. Hence, I will not go near high-debt companies that show abnormal ‘profit’ growth, and engage in frequent dilutions. Take time off to read balance sheets, or be safe and stick to companies with the positive attributes, namely: no debt, normal tax payout and generous dividends. An important avenue is the facility given by the Government of India to let us invest overseas. I believe that, over time, the Indian rupee is going to be a loser, unless we strike oil, and thus keeping some of our wealth in foreign currency should be a good defence. In this, I will go straight for the US dollar. No matter what happens to it, the world still has no option but to trust the greenback. It would provide me with a hedge against inflation as well. Ultimately, each one has to be comfortable with the risk appetite he/she has. I am not a believer in creating an excel sheet to plan my savings and investments. I save what I can and invest what I wish to.

SKYFALL- Review- By Narasimhan Balakrishnan

Skyfall: No. 23, after 50 years 0 Comments, Be the first to comment+ COMMENT NARASIMHAN BALAKRISHNAN | 06/11/2012 05:38 PM | Skyfall is the perfect way to commemorate 50 years of Bond on the silver screen. It is not only the best Bond movie to date, but also the best action movie of this year Around 50 years ago, Sean Connery was chosen to play the lead in a movie, whose franchise would be the second highest grosser ever and probably the first after a couple more titles. Coming to the 21st century, James Bond movies have had their shares of highs and lows. Over 23 movies, six actors in the lead role and 12 and a half billion dollars grossed (inflation adjusted), the James Bond movie series is one of the most iconic ever. Skyfall, the 23rd Bond film, Daniel Craig’s third outing as 007, is probably the most awaited film this year after The Dark Knight Rises. And after the rather mediocre Quantum of Solace, fans would certainly hope for a much better movie. Delayed by a year due to MGM’s financial woes, Skyfall may be late but is certainly worth the wait. Skyfall is the Bond movie that takes the character so wonderfully introduced in 2006’s Casino Royale to another level. The plot of Skyfall is unlike that of any previous Bond movie. The 23rd time around, things are a lot more personal. MI6’s list of operatives in terrorist organizations is stolen and names are released publicly, five every week. M is haunted by a certain person from her past and it is up to an aging and slightly haggard Bond to clean things up. It all leads up to the climax, where one understands why the film is named so. What happened with the reboot of the Bond franchise in 2006 was that grandiose action sequences aside, the movies became more connected to the real world than the times of pen grenades, watch embedded grappling hooks and the over-the-top Armageddon schemes. James Bond is much more human and quite fallible too. Long gone is the one-liner spewing, un-woundable super spy-cum-killing machine who never missteps. Helmed by Sam Mendes (Road to Perdition, American Beauty), Skyfall is THE definitive Bond movie for the 21st century. The movie’s strengths are quite a few. First and foremost, the cinematography. The man behind the lens is Roger Deakins, who adds Skyfall to his already reputable list that includes movies like The Shawshank Redemption and A Beautiful Mind. The camera work is excellent throughout and shines particularly in a dimly-lit fight sequence in Shanghai and the climax. A big plus is that Deakins consciously avoids the use of shaky-cam, which would certainly feel out of place in a Bond movie. The locales are all captured wonderfully, be it the stunning opening sequence in Turkey, the Macau Casino or the climax in the Scottish countryside. Lighting is pitch-perfect in all scenes too. Never unnecessarily dark or too bright, this movie deserves an Oscar nomination for the cinematography. It is probably the best shot movie of the year. Next, the screenplay. With Neal Purvis and Robert Wade (Bond regulars) as the screenwriters, the screenplay’s missteps, if any are few and minor. A complaint could be made about the movie being too long but personally, I felt it was correctly paced. While the movie opens leisurely with the introduction of characters, the pace quickens and the tension is sustained very well. It goes to show that style and substance can co-exist in a Bond movie, which one certainly hasn’t seen in movies like Die Another Day or the immensely forgettable Living Daylights. Each character is well written and some characters given a new dimension too. The plot, while containing sufficient action, has a fair amount of emotional content too, something rarely seen in the Connery or Moore movies. While the movie has a serious undertone to it, there are some genuinely funny moments too. Moving on to the cast. Daniel Craig as Bond is the closest anyone has come to Ian Fleming’s character so far. Craig portrays Bond as a flawed man who seems to be losing his edge, but has an unwavering sense of duty. His performance is immaculate and it is clear that he has given his all to the role. He breathes life into Bond. While Oscar considerations are unlikely, it is certainly a top-notch performance. Every Bond movie has two heroines, one a damsel in distress who is seduced by Bond and mostly dies somewhere in the movie. And then there’s one that carries on till the end. This time around, the second job is done by Judi Dench, as M. She is consistently excellent and brings an extra dimension to the character and is unlike cold-hearted decision maker she has portrayed in earlier Bond films. It’s nice to see M get her hands dirty for once. Craig and Dench aside, the biggest strength of the movie is the antagonist Raoul Silva, played by a blond Javier Bardem. Javier Bardem is tremendous as the agent-turned-terrorist with unresolved mommy issues. There are moments where Silva is charming and humorous. There are some where is emotional. And some in which he’s downright menacing. Bardem pulls off all these scenes with consummate ease. One can safely say Silva is the best Bond villain ever. Bardem follows up his negative turn in No Country For Old Men with a completely different but nevertheless outstanding portrayal of Silva. His screen presence is outstanding. Oscar worthy performance, surely. Other cast members include Ralph Fiennes as Mallory, head of the British Intelligence Services, Naomie Harris—the inexperienced field agent and Ben Whishaw as the quartermaster. The action scenes are superb. No other word for them. Each action sequence has been choreographed painstakingly and the end result is amazing. Right from the opening chase in Istanbul to the pyrotechnics heavy climax, the scenes are uniformly stunning. In particular, a chase sequence in London followed by a shootout is exhilarating. The music, done by Thomas Newman who has worked with Mendes before, is top notch. Every scene has music that complements it. The opening track by Adele is also quite good. While the film boasts of so many positives, it has a few minor faults. The character of Severine (previously mentioned victim-heroine) is rather weak and Berenice Marlohe is not very good in the role. An argument could be made against pacing, as mentioned before, but these issues are few and far between. It is as close to the perfect Bond movie as one could hope for. While this is Bond in the 21st century, Skyfall does pay enough reverence to the Bond of the sixties and seventies and should keep old Bond loyalists happy too. The addition of two new characters which I won’t reveal should bring a smile to the faces of Connery-Moore fanboys. And the way the movie plays out in the end, it ends up as a perfect mix of old and new. Skyfall is not only the best Bond movie to date, but also the best action movie of this year and one can only hope the next Bond movie reaches the heights this does. It is the perfect way to commemorate 50 years of Bond on the silver screen. Bond certainly will be back, and I’m looking forward to it.